Advances in Behavioral Finance, Volume II (Roundtable Series in Behavioral Economics, 2, Band 2) - Softcover

Softcover

ISBN 10: 0691121753 ISBN 13: 9780691121758

Verlag: Princeton University Press, 2005

Inhaltsangabe

This book offers a definitive and wide-ranging overview of developments in behavioral finance over the past ten years. In 1993, the first volume provided the standard reference to this new approach in finance--an approach that, as editor Richard Thaler put it, "entertains the possibility that some of the agents in the economy behave less than fully rationally some of the time." Much has changed since then. Not least, the bursting of the Internet bubble and the subsequent market decline further demonstrated that financial markets often fail to behave as they would if trading were truly dominated by the fully rational investors who populate financial theories. Behavioral finance has made an indelible mark on areas from asset pricing to individual investor behavior to corporate finance, and continues to see exciting empirical and theoretical advances. Advances in Behavioral Finance, Volume II constitutes the essential new resource in the field. It presents twenty recent papers by leading specialists that illustrate the abiding power of behavioral finance--of how specific departures from fully rational decision making by individual market agents can provide explanations of otherwise puzzling market phenomena. As with the first volume, it reaches beyond the world of finance to suggest, powerfully, the importance of pursuing behavioral approaches to other areas of economic life. The contributors are Brad M. Barber, Nicholas Barberis, Shlomo Benartzi, John Y. Campbell, Emil M. Dabora, Daniel Kent, François Degeorge, Kenneth A. Froot, J. B. Heaton, David Hirshleifer, Harrison Hong, Ming Huang, Narasimhan Jegadeesh, Josef Lakonishok, Owen A. Lamont, Roni Michaely, Terrance Odean, Jayendu Patel, Tano Santos, Andrei Shleifer, Robert J. Shiller, Jeremy C. Stein, Avanidhar Subrahmanyam, Richard H. Thaler, Sheridan Titman, Robert W. Vishny, Kent L. Womack, and Richard Zeckhauser.

Über diesen Titel

Über die Autorin bzw. den Autor

Edited by Richard H. Thaler

Von der hinteren Coverseite

"This book provides a thorough review of progress in the field of behavioral finance over the past ten years. By every measure, it will have considerable impact. It is must reading for finance economists as well as anyone interested in behavioral economics. Graduate students and faculty alike will find this book to be an invaluable reference to which they will often refer."--David Laibson, Harvard University

"Advances in Behavioral Finance, Volume II should be on every Ph.D. reading list in finance programs. It should be seen as a finance book per se, not just a niche 'behavioral finance' book. Thaler's preface is very readable, as is the superb introduction by Thaler and Nick Barberis."--Colin Camerer, California Institute of Technology, author of Behavioral Game Theory and Advances in Behavioral Economics

"This book brings together almost all of the most important work in behavioral finance from the last decade, in a manageable presentation suitable for masters- and doctoral-level classes on the subject."--Jay R. Ritter, Cordell Professor of Finance, University of Florida

Auszug. © Genehmigter Nachdruck. Alle Rechte vorbehalten.

Advances in Behavioral Finance, Volume II

Princeton University Press

Copyright © 2005 Princeton University Press
All right reserved.
ISBN: 978-0-691-12175-8

Chapter One

A SURVEY OF BEHAVIORAL FINANCE

Nicholas Barberis and Richard Thaler

1. Introduction

The traditional finance paradigm, which underlies many of the other articles in this handbook, seeks to understand financial markets using models in which agents are "rational." Rationality means two things. First, when they receive new information, agents update their beliefs correctly, in the manner described by Bayes's law. Second, given their beliefs, agents make choices that are normatively acceptable, in the sense that they are consistent with Savage's notion of Subjective Expected Utility (SEU).

This traditional framework is appealingly simple, and it would be very satisfying if its predictions were confirmed in the data. Unfortunately, after years of effort, it has become clear that basic facts about the aggregate stock market, the cross-section of average returns and individual trading behavior are not easily understood in this framework.

Behavioral finance is a new approach to financial markets that has emerged, at least in part, in response to the difficulties faced by the traditional paradigm. In broad terms, it argues that some financial phenomena can be better understood using models in which some agents are not fully rational. More specifically, it analyzes what happens when we relax one, or both, of the two tenets that underlie individual rationality. In some behavioral finance models, agents fail to update their beliefs correctly. In other models, agents apply Bayes's law properly but make choices that are normatively questionable, in that they are incompatible with SEU.

This review essay evaluates recent work in this rapidly growing field. In section 2, we consider the classic objection to behavioral finance, namely that even if some agents in the economy are less than fully rational, rational agents will prevent them from influencing security prices for very long, through a process known as arbitrage. One of the biggest successes of behavioral finance is a series of theoretical papers showing that in an economy where rational and irrational traders interact, irrationality can have a substantial and long-lived impact on prices. These papers, known as the literature on "limits to arbitrage," form one of the two buildings blocks of behavioral finance.

To make sharp predictions, behavioral models often need to specify the form of agents' irrationality. How exactly do people misapply Bayes's law or deviate from SEU? For guidance on this, behavioral economists typically turn to the extensive experimental evidence compiled by cognitive psychologists on the biases that arise when people form beliefs, and on people's preferences, or on how they make decisions, given their beliefs. Psychology is therefore the second building block of behavioral finance, and we review the psychology most relevant for financial economists in section 3.

In sections 4-8, we consider specific applications of behavioral finance: to understanding the aggregate stock market, the cross-section of average returns, and the pricing of closed-end funds in sections 4, 5 and 6 respectively; to understanding how particular groups of investors choose their portfolios and trade over time in section 7; and to understanding the financing and investment decisions of firms in section 8. Section 9 takes stock and suggests directions for future research.

2. Limits to Arbitrage

2.1. Market Efficiency

In the traditional framework where agents are rational and there are no frictions, a security's price equals its "fundamental value." This is the discounted sum of expected future cash flows, where in forming expectations, investors correctly process all available information, and where the discount rate is consistent with a normatively acceptable preference specification. The hypothesis that actual prices reflect fundamental values is the Efficient Markets Hypothesis (EMH). Put simply, under this hypothesis, "prices are right," in that they are set by agents who understand Bayes's law and have sensible preferences. In an efficient market, there is "no free lunch": no investment strategy can earn excess risk-adjusted average returns, or average returns greater than are warranted for its risk.

Behavioral finance argues that some features of asset prices are most plausibly interpreted as deviations from fundamental value, and that these deviations are brought about by the presence of traders who are not fully rational. A long-standing objection to this view that goes back to Friedman (1953) is that rational traders will quickly undo any dislocations caused by irrational traders. To illustrate the argument, suppose that the fundamental value of a share of Ford is $20. Imagine that a group of irrational traders becomes excessively pessimistic about Ford's future prospects and through its selling, pushes the price to $15. Defenders of the EMH argue that rational traders, sensing an attractive opportunity, will buy the security at its bargain price and at the same time, hedge their bet by shorting a "substitute" security, such as General Motors, that has similar cash flows to Ford in future states of the world. The buying pressure on Ford shares will then bring their price back to fundamental value.

Friedman's line of argument is initially compelling, but it has not survived careful theoretical scrutiny. In essence, it is based on two assertions. First, as soon as there is a deviation from fundamental value-in short, a mispricing-an attractive investment opportunity is created. Second, rational traders will immediately snap up the opportunity, thereby correcting the mispricing. Behavioral finance does not take issue with the second step in this argument: when attractive investment opportunities come to light, it is hard to believe that they are not quickly exploited. Rather, it disputes the first step. The argument, which we elaborate on in sections 2.2 and 2.3, is that even when an asset is wildly mispriced, strategies designed to correct the mispricing can be both risky and costly, rendering them unattractive. As a result, the mispricing can remain unchallenged.

It is interesting to think about common finance terminology in this light. While irrational traders are often known as "noise traders," rational traders are typically referred to as "arbitrageurs." Strictly speaking, an arbitrage is an investment strategy that offers riskless profits at no cost. Presumably, the rational traders in Friedman's fable became known as arbitrageurs because of the belief that a mispriced asset immediately creates an opportunity for riskless profits. Behavioral finance argues that this is not true: the strategies that Friedman would have his rational traders adopt are not necessarily arbitrages; quite often, they are very risky.

An immediate corollary of this line of thinking is that "prices are right" and "there is no free lunch" are not equivalent statements. While both are true in an efficient market, "no free lunch" can also be true in an inefficient market: just because prices are away from fundamental value does not necessarily mean that there are any excess risk-adjusted average returns for the taking. In other words,

"prices are right" [right arrow] "no free lunch"

but

"no free lunch" [??] "prices...

Details zur Ausgabe

• Verlag: Princeton University Press
• Erscheinungsdatum: 2005
• Sprache: Englisch
• ISBN 10: 0691121753
• ISBN 13: 9780691121758
• Einband: Taschenbuch
• Anzahl der Seiten: 740
• Herausgeber: Thaler Richard H.
• Kontakt zum Hersteller: Princeton University Press; https://press.princeton.edu/books; ; 7th Floor, New South Building; PRINCETON; NJ; 8544; USA
• Verantwortliche Person: gpsr@libri.de; gpsr@libri.de; ; Europaallee 1; Bad Hersfeld; 36244; Deutschland